Cannabis rules in California: How does your city make money on weed?

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Though other ways to purchase are coming most of the transactions for purchasing marijuana at the OC3 Dispensary in Santa Ana was with cash. (File: Photo by Micheal Goulding, Orange County Register/SCNG)

Some California cities and counties have raked in tens of thousands to millions of dollars in cannabis-related tax revenue since recreational sales became legal on Jan. 1.

Yet more than half of the jurisdictions that so far have welcomed the cannabis industry aren’t yet making those businesses pay a local marijuana tax. And those that do impose a local tax are using a wide range of tax strategies, with one city charging cannabis merchants 1 percent of gross sales while another charges $25 per square foot of business space, and another charges a flat rate of $30,000 a year.

Some cities and counties are ditching the idea of taxing the marijuana industry altogether, relying instead on fee agreements they negotiate with businesses.

These are insights from a new statewide database tracking the marijuana policies set by all 482 cities and 58 counties in California, which was created by the Southern California News Group and sister publications statewide.

In the first of three stories based on that information, we looked at how cities are responding to the cannabis industry and how those rules match up with voter sentiment.

In the second story, we examined how some local governments are imposing limits on personal cannabis rights by requiring pricey permits to grow at home or blocking even licensed delivery services.

Here, we look at how California cities and counties are attempting to make money from legal weed.

We chatted with local leaders, industry representatives and taxpayer advocates about the range of schemes and rates at play. We also repeated a single question:

When it comes to marijuana taxes, how much is too much?

TAXES TRAIL REGULATIONS

As of Jan. 1, Proposition 64 (approved by 57 percent of state voters in November 2016) imposed a statewide tax of 15 percent on all marijuana sold in California — a figure that doesn’t include any tariffs charged by local governments.

The law also requires cities and counties to get voter approval before they add any local cannabis tax. But our database shows that while 18 of the state’s 58 counties have laws that welcome at least one type of marijuana business, just eight counties so far have passed ballot measures to tax those operations. A similar trend is true among cities; voters in just 57 of the 144 cities that permit marijuana businesses in their borders have approved taxes on the industry. (That includes Culver City, where preliminary results from an April 10 special election shows residents overwhelmingly approved a new cannabis tax.)

State numbers won’t be official until next month, but cities with taxes in place say the first quarter of 2018 was strong.

Cannabis was kind to small cities — Berkeley made three times as much cannabis revenue this January, more than $38,000, than it did in January of 2017, when only medical marijuana sales were legal. And Perris, in Riverside County, took in $41,124 in taxes from its marijuana businesses in January and February.

Cannabis also brought money into bigger cities. San Jose made nearly $2.2 million in cannabis revenue in the first two months of the year, while Oakland made $2.86 million in the first quarter.

But big or small, many cities and counties say additional local taxes are needed to cover the costs of processing applications, performing inspections, gathering records and enforcing cannabis-related ordinances. Officials also note that residents expect to see some financial benefit in exchange for welcoming the profitable and, for many, still-controversial industry.

That’s why a number of jurisdictions that haven’t yet passed marijuana taxes are looking to get proposals on the ballot later this year.

Supervisors in Yolo, Santa Barbara, San Luis Obispo and Imperial counties have agreed or discussed seeking voter approval on taxes this year. Cities such as San Rafael and Nevada City also plan to have marijuana tax measures on the June ballot, while Ceres and Willits are eyeing the November election.

It can take months — and hundreds of thousands of dollars — to get measures on the ballot. So some cities and counties have opted to let businesses open before taxes are in place in hopes of giving local operators a competitive edge as the state started licensing the industry and permitting recreational marijuana sales on Jan. 1.

Then there are a few cities that have gone the opposite direction, passing tax measures even though they don’t allow the industry to operate in their borders just in case they change their minds down the road. Fillmore, for example, voted to tax the cultivators and distributors in 2016 — but, so far, it still blocks all businesses.

TAX SCHEMES VARY

Most communities have voted in taxes as a percentage of sales receipts, with approved rates ranging from 2 to 20 percent.

However, many of those taxes were approved on the condition that they could be “up to” those maximum amounts, with initial rates set lower in nearly every instance. This was done as a way to give law-abiding operators a chance to take root and compete with entrenched black market dealers.

A number of communities have voted to tax different segments of the industry at different rates, often hitting shops the hardest and going easier on, say, cannabis testing labs. Los Angeles voters, for example, opted to tax recreational sales at 10 percent, cultivation at 2 percent, and testing at 1 percent.

Some cities and counties have voted to ditch the percentage and instead tax the marijuana industry as a dollar amount per square foot — a method mostly used for cultivators. Those rates range from $1 to $25 per square foot, with initial rates again often set lower.

Several jurisdictions tax indoor growers more than outdoor growers. Lake County, for examples, charges $1 per square foot for outdoor cultivation and $3 per square foot for indoor cultivation.

Others set a rate that decreases based on size. Parlier, in Fresno County, charges $10 per square foot for the first 5,000 square feet and gradually drops the rate until it hits $2 per square foot for anything bigger than 40,000 square feet.

A few communities are taxing businesses at a flat dollar rate, such as the annual $30,000 fee charged in Kings City.

Rancho Mirage, which only allows cannabis distribution, charges $59 per vehicle in a company’s fleet. And nearby Cathedral City charges companies that make marijuana products 40 cents per gram on oils and 40 cents per piece on edibles.

Some of these tax measures also include a minimum fee. In Long Beach, voters said marijuana businesses should pay at least $1,000 in taxes per year, no matter how much money they make or even lose.

DEVELOPMENT FEES VS TAXES

Just because cities and counties don’t have voter-approved taxes in place for marijuana businesses doesn’t mean they aren’t making money from the industry. Many are recouping their costs and making a profit through development agreements with business owners.

Ukiah, in Mendocino County, doesn’t have a tax in place. But businesses that want to set up shop must pay deposits of $600 to $3,000, plus annual fees of $1,000.

Williams, in Colusa County, charges business permit fees that vary by square footage.

Victor Ponto, an attorney with Best Best & Krieger who advises Southern California cities on marijuana policy, said these development agreements are often serving as placeholders. He said most cities he’s worked with are relying on the development fee approach until they can get a tax measure on a ballot.

But while Santa Ana has a voter-approved tax for medical marijuana shops, with a rate now set at 6 percent, the city council recently opted to charge an 8 percent “operating agreement fee” for recreational stores. Under that plan, Santa Ana took in nearly $1 million in cannabis revenue in January and February alone.

And Riverside County supervisors in a split vote recently opted to go with developer fees over a tax measure on the November ballot. Supporters pointed to the cost of an election and other concerns with that process, while opponents said they fear the move could leave the city open to liability for violating Proposition 218, which requires voter approval for all new taxes.

Such arrangements aren’t ideal from a taxpayer perspective, according to David Kline with the nonprofit California Taxpayers Association.

“Taxes are far superior to hidden fees that lack transparency and seek to get around the voters’ right to decide the fate of all local taxes,” Kline said.

From an industry perspective, it’s the amount — not the manner in which revenue is collected — that matters most, according to Hezekiah Allen, executive director of the California Growers Association, a trade group representing cannabis cultivators.

“Both tools work in the right circumstances,” he said. “Development agreements and fees work well in communities that may want to ‘test the waters.’ These type of projects offer the local government more ability to work in partnership with a private party to shape a project.”

TOO HIGH?

Once all taxes are factored in — including state sales, the statewide marijuana tax and local cannabis taxes — recreational consumers are paying as much as 40 percent tax on every legal transaction.

For business owners, these hefty taxes are often on top of application fees, annual license fees, cultivation taxes and other significant costs of complying with new state regulations.

A proposed Assembly bill would temporarily ease that burden, as legislators are looking for ways to help the emerging legal industry compete with the California’s entrenched black market.

Assemblymen Tom Lackey, R-Palmdale, and Rob Bonta, D-Oakland, are pitching a plan to cut the marijuana sales tax rate from 15 percent to 11 percent, and suspend all cultivation taxes, until June 2021.

Some cities are also reconsidering their local marijuana tax rates.

Berkeley’s tax for recreational cannabis was set at 10 percent when sales started in January. In mid-February, hoping to make its dispensaries more competitive with neighboring cities and the black market, the city council cut it to 5 percent.

Santa Barbara residents passed a ballot measure in November 2016 that imposed a 20 percent tax on cannabis businesses. But the city council opted to lower the rate to 2 to 6 percent of gross receipts.

These moves are a step in the right direction, industry insiders and taxpayer advocates say.

“But before passing either taxes or fees,” Kline said, “local governments should take a good look at the spending side of the ledger, to ensure that existing tax dollars are being used efficiently.”

Brooke Edwards Staggs is a general assignment reporter with a focus on covering the politics, business, health and culture of cannabis. Journalism has led Staggs to a manhunt in Las Vegas, a zero gravity flight over Queens and a fishing village in Ghana. The Big Bear native is addicted to education. She earned her bachelors degree in English from California Baptist University, then got her master's in education as she taught high school English in the Inland Empire. After four years in the classroom, she left in 2006 to be a student again herself, earning a masters degree in journalism from New York University while interning and freelancing for a variety of publications. She sees journalism as another form of teaching, helping readers make informed decisions and better understand the world around them. Staggs spent five years as a staff writer then city editor at the Daily Press in Victorville. She won several awards for her work there, including best breaking news story from the California Newspaper Publishers Association for her tale of a teen who shot his father in a hunting accident. She joined the Orange County Register in January 2013, covering several south Orange County communities and the city of Tustin before taking on the marijuana beat in February 2016. On occasion, she also teaches community college and ghostwrites nonfiction books. Staggs loves dancing and new adventures. She hates water slides and injustice. If she doesn’t get right back to you, there’s a good chance she’s sitting with her DJ husband on a plane or train or boat destined for somewhere – anywhere – they’ve never been.